Cannabis Contracts: Caveat Emptor?

AuthorSusan F. Dent
Pages23-24
Published in Litigation News Volume 47, Number 3, Spring 2022. © 2022 b y the American Bar Ass ociation. Reproduc ed with permission. A ll rights reserv ed. This information or an y portion there of may not be copied or dis seminated in any
form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.
The U.S. Court of Appeals for the
Eleventh Circuit concluded that the
convention required the parties to
“actually sign an agreement to arbi-
trate. . . to compel arbitration.” The
Eleventh Circuit reasoned that under
the convention, equitable estoppel
could not be invoked by a nonsignatory
to compel arbitration. Since GE Energy
Power had not signed the agreement,
the Eleventh Circuit reversed.
On further appeal, the U.S. Supreme
Court held that the convention does not
conf‌lict with the principle of equitable
estoppel to enforce arbitration agree-
ments by nonsignatories. Citing Chapter
1 of the Federal Arbitration Act (FAA),
the Court reasoned that state law princi-
ples of equitable estoppel apply to allow
nonsignatories to enforce arbitration
agreements. Further, the Court noted
that Section 203 of the FAA grants fed-
eral courts jurisdiction over actions aris-
ing under the convention.
The Court found nothing in the
convention addressing nonsignatory
enforcement or precluding enforce-
ment of arbitration agreements by
reference to state law—which the FAA
expressly allows. The Court concluded
that the “silence is dispositive because
nothing in the text of the Convention
could be read to otherwise prohibit
the application of domestic equitable
estoppel doctrines.”
“There is a certain fairness in what
the court has done,” concludes Henry
R. Chalmers, Atlanta, GA, cochair
of the Section’s Alternative Dispute
Resolution Committee. The defendant
“was seeking to enforce the underlying
agreements and reap all of the benef‌its
available to it under them, yet it also
sought to deprive its adversary of the
very procedural protections the defen-
dant agreed to include in those docu-
ments,” Chalmers observes.
The holding makes the United States
a favorable forum for resolution of inter-
national arbitration agreements, accord-
ing to Section leaders. “By the Court’s
estimation, this decision brings U.S.
international arbitration law in line with
other major jurisdictions for arbitra-
tion regarding enforcement of awards
against nonsignatories,” states Betsy A.
Hellman, New York, NY, cochair of the
Section’s Alternative Dispute Resolution
Committee. According to Hellman,
the Court’s ruling “should enhance the
attractiveness of the United States as a
forum for enforcement of international
arbitration awards.”
The Court was a lso following a cen-
tral tenet of the conventio n, which
“was to give awards respe ct and
make them enforcea ble from nation
to nation, not to place l imitations on
their enforcement,” opines Mitchell
L. Marinel lo, Chicago, IL, cochair of
the Section’s Alte rnative Dispute
Resolution Committee.
Cannabis Contracts:
Caveat Emptor?
By Susan F. Dent, Litigatio n News
Associa te Editor
When the subject matter of a contract
involves a Schedule 1 substance such as
cannabis, federal courts cannot enforce
performance or order remedies. The U.S.
District Court for the District of Oregon
highlighted an unexpected risk of con-
tracting for cannabis-related services: a
lack of federally enforceable remedies.
Indeed, as the court raised this issue sua
sponte, ABA Litigation Section leaders
and industry professionals see this rul-
ing as a reminder to always consider the
impact of inconsistent state and federal
policies when counseling on cannabis
industry matters.
In J. Lilly LLC v. Clearspan Fabric
Structures International, Inc., a cannabis
company signed an equipment lease
agreement and a construction contract
that provided that the defendant con-
struction company would lease to the
cannabis company a large greenhouse
for cultivating marijuana plants. The
construction company hired a subcon-
tractor to construct the greenhouse for
the cannabis company. The subcon-
tractor’s work was allegedly subpar,
resulting in leaks, holes in the roof, and
ventilation system issues.
After unsuccessfully attempting
repairs, the cannabis company found
the entire greenhouse unsuitable for
housing a cannabis crop and sued. It
alleged breach of contract and breach
of warranty against the construction
company, with an added negligence
claim against the subcontractor, and
sought $5.4 million in lost prof‌its
damages.
The construction company moved
for summary judgment on the lost prof-
its claim.
Noting that neither party raised the
issue of illegality of contractual subject
matter, the court ordered all parties
to brief the issue of whether a federal
court sitting in diversity can award a
party lost prof‌its generated from the
sale of marijuana.
Relying on both the Controlled
Substances Act (CSA) and the
Supremacy Clause of the U.S.
Constitution, the court found that,
under current federal law, it cannot.
The court f‌irst reasoned that the
CSA designates cannabinoids as a
“Schedule 1” substance and criminal-
izes its sale and surrounding activities
in support of sale, such as those con-
templated in the contracts at issue.
The court also concluded that the
Supremacy Clause supports a f‌inding
that the CSA applies to, and is supe-
rior to, state law which may permit
the sale and distribution of cannabis.
Accordingly, the court declined to
enforce the cannabis-related contracts.
ABA leaders and industry attorneys
agree that this ruling highlights an oft-
overlooked issue in cannabis-industry
contracts: legality of enforcement and
availability of remedies upon breach.
“This ruling is a perfect example
of why special drafting considerations
need to be taken into account when
cannabis-industry contracts are being
negotiated and entered into,” says
Jacqueline Z. Fox, Denver, CO, an ABA
member who practices cannabis law.
“The industry takeaway from this ruling
should be to increase each respective
party’s attention towards general can-
nabis contract-drafting strategies and
to further push marijuana-related liti-
gation towards state courts. Given the
underlying nuances involved in various
aspects of everyday matters within the
cannabis industry, traditional boiler-
plate contracts are inherently suscep-
tible to error,” advises Fox.
Drafting strategies can minimize
contract enforceability risks. “First,
include forum-selection and choice-of-
law clauses for your respective state
court,” suggests Fox. “This ensures that
litigation stays in marijuana-friendly
state court, thus reducing the possibil-
ity of federal courts sua sponte raising
unclean hands or other federal illegal-
AMERICA N BAR ASSOCIATION SPRING 20 22 • VOL. 47 NO. 3 | 23

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